Economics homework help needed

Oct 22nd, 2015

SoccerBoss

Category:

Economics

Price: $5 USD

Question description

5. (6 points) EITC.
Assume that the structure of EITC is as follows:
During the phase-in range, EITC recipients receive an additional 20% of their income for
each dollar earned up to a maximum of a $2,000 credit.
They can earn this $2,000 credit until the phase-out range, which begins when they start
earning $15,000 or more.
During the phase-out range, the credit reduces by 10% until it reaches $0.
(a) (2 points) Graph the structure of the EITC with Income on the X-axis and the EITC
credit on the Y-axis. Clearly label all relevant points on the graph, including the maximum
credit, earnings when the credit reaches $0, and earnings at the end of the phase-in range
and at the beginning and end of the phase-out range.
(b) (2 points) Now assume a worker earns $1,000 per-week if she works and can work up to
40 weeks a year. Plot a budget constraint for consumption (Y) on the Y-axis and hours of
Leisure (L) on the X-axis assuming that EITC exists. Now, on the same graph, draw her
budget constraint before EITC legislation was enacted (i.e. if EITC never existed).
Be sure to label on both the Y and X axes the values for each part of EITC. That
is, at how many weeks of work does the phase-in end; what will our worker earn? At how
many weeks of work does the phase-out begin and end; how much does our worker earn at
each point?
(c) (2 points) Now assume that this worker was initially working 36 weeks before EITC was
enacted. Draw an indifference curve showing this point and label the curve UN and the
point N. Now draw another indifference curve for the same worker assuming that EITC
legislation has just passed. Label this curve UE and her preferred bundle of Leisure and
Consumption point E. After EITC is passed, do you think she’ll work more, less or the
same? Show this and say why.